Second installment in the series. Also the last, I hope.
In 1998, Long-Term Capital Management nearly collapsed. They had $129 billion in assets and $124 billion in liabilities. But the real problem was that they were counterparty to $1.25 trillion in derivatives trades. Because their collapse might have created a chain-reaction throughout the financial system, then-President of the NY Fed William McDonough called together the heads of the major commercial banks and investment banks and politely asked them to cooperate. The banks bailed out LTCM without any government backstop. (Bear Stearns declined to participate in the bail-out, a fact never forgotten by its peers.)
Bear Stearns (10-Q) had $399 billion in assets (or “assets”) and $387 billion in liabilities (10-Q page 5). But the real problem was that they were counterparty to $2.7 trillion in derivatives trades (10-Q page 36). That was enough for the Fed to give JP Morgan a hand in taking them over last March.
Lehman brothers (10-Q) has $640 billion in “assets” and $613 billion in liabilities (10-Q pages 5-6). But they are counterparty to “only” $729 billion in derivatives trades (10-Q page 40). This weekend, the current President of the NY Fed, Timothy Geithner, has called together the heads of the major commercial banks and investment banks and is politely asking them to cooperate. But this time, they want another deal like Bear Stearns. Think of it as a high-stakes game of chicken, with Hank Paulson representing you. We will know the outcome by 8 P.M. EDT tomorrow.
Merrill Lynch has $966 billion in assets and $931 billion in liabilities. They are counterparty to $4.2 trillion in derivatives trades.  They get brownie points for including HTML anchors in their 10-Q. (Do we still use the phrase “brownie points” after Katrina?)
AIG (10-Q) has $1.0 trillion in assets (10-Q page 1) and $972 billion in liabilities (page 2). They are counterparty to at least $447 billion in credit default swaps (page 87). But that does not include the old-fashioned insurance operations, and who knows what else because I am tired of slogging through this stuff. Executive summary: What would happen if an insurer with $1 trillion in assets were to fail? I have no idea; and neither, I suspect, does anyone else.
If you have anything to contribute to these figures, please let me know.
So, how do we know that 2.7 tril is a risk that is too scary to contemplate (BS bailout) but LEH’s nearly 800 bil is just peachy and the system wont collapse? I keep getting back to this and still cant find an answer anywhere.
That is a very good question, and I am not convinced anybody knows the answer. I suspect one of the purposes of the meeting this weekend is to try to figure it out. As I write (Sunday 1100 EDT), news reports suggest Paulson continues to hold firm.